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I recently returned
from TED, always one of the
highlights of the year for me. It’s an
opportunity to pause your life and tune into and connect with what else is
going on outside of your world.

Inevitably when I
return many friends ask me “What is TED” The fact is that it’s almost impossible to
sum up the TED experience to someone
who hasn’t attended. You can try to describe the fascinating talks from
world renown experts in almost every field and the amazing insight you
personally gained, or the incredibly wide diversity and passion of the
attendees, or the fact that almost no “business” gets discussed at TED but somehow lots gets done, or even the
implausibly relaxed atmosphere that pervades the entire week and allows
conversations and connections to be made. But the real truth as far as I
can tell is that the magic of TED is
that its almost pure serendipity and THAT is almost impossible to
explain. When you mix together world class thinkers that genuinely give a
damn about making things better, in an atmosphere that encourages and supports
learning, collaborating and making a difference strange and wonderful stuff
happens. Those are affectionately referred to as “TED Moments”. For some of these "Moments" you can check out the official TED Blog,Michael does a nice job chronicling his TED moments, and Kate had a very sweet TED moment too.

I had a number of
these moments, but perhaps t the most memorable was a seemingly
improbably conversation with Bill Clinton. In addition to him being a delightfully normal guy to talk with
(although the conversation topics were anything from normal) he brought home
the point that it’s never too late to make a difference, admit a mistake, and
right a wrong. In describing the latest
health and economic initiative of the Clinton Foundation in Rwanda, and why
they picked that particular country – he simply said I, my administration and
this country could have and should have done more during the genocide - it was
wrong and I want to do something to address the suffering that mistake caused. Had
this message been delivered as it has via mass media you could easily dismiss
it for a number of reasons, but delivered 1:1 where the sincerity was palpable,
it was impossible to ignore.

Chris Anderson and
the folks at TED will be making the
many of the talks at TED available on
line. Stay tuned to the website, and
check them out. If you take a moment out
of your day to pause, explore what’s going in the world and to give a damn
about making a difference you may have a TED moment too!

One of the most frequently asked question I hear is “how
much money should I raise”. Given the relatively large amount of capital
that is available from Angels and VC’s many would assume the correct answer is
“as much as you can”. The answer you
should consider is “just enough”.

Most of you are probably familiar with the dangers of taking
too little money. For a moment let’s
consider the downside of taking too much funding. The negatives fall into three categories.

Ownership/Valuation – Your Company
is likely to go through several funding events on the road to profitability and
eventual liquidity. Your goal is to
preserve the ownership for founders and employees by raising each round of
financing at increasing valuations. Your
interests and those of your investors are very much aligned here. But by taking too much money you may also
take more dilution than necessary in the current or subsequent round.

Poor Fiscal Discipline – Having
too much money in the bank can lead to poor fiscal discipline. We have all heard or experienced this phenomenon
where companies that were too well funded failed to spend wisely or
conservatively. Before you raising too
much money, make sure you and your investors are on the same page as to how the
money will be spent. Often when
investors put large amounts of money into your company their expectations are
for you to spend it and grow quickly. So
even if you can resist the temptation of spending the money too quickly, your investor
Board members may not.

Misalignment of Interests – It’s
important to have yours’ and your investor’s interests aligned. An investor’s goal is generally to return at
least 4-10X the capital that is invested. By having too much money invested in the company there is the potential
that your investors will want and need a much larger liquidity event than you
would be satisfied with – this is the “swing for the fences” strategy which
doesn’t always generate a happy outcome.

The best way to preserve your ownership and keep your
interests aligned with investors is to determine how much is “just
enough”. Start by determining the key
risks in your business plan and the operating metrics and milestones that track
those risks. As you examine your
operating plan there will be certain obvious pivot points for the business
where the completion of the milestones represents a significant reduction of
risk. These pivot points represent
significant increases in the valuation of the company at which you can raise
the next round of funding and preserve ownership stakes.

Here are some examples of pivot points…

Market

Completion of extensive customer interviews that
validate market demand for your product or service

Implementing a repeatable sales process and low
variance of forecast to actual bookings.

Team

Completion of the Management Team

Key technical or sales hires

Technology

Completion of a prototype

First
customer shipment of the product

Achieving short and repeatable engineering release cycles

When you have determined what you believe are the pivot
points for your business, you should develop a detailed operating budget that
attains them. By aligning your budget
with the pivot points you will now know how much money you need to raise to
lower risk, create value and achieve a significantly higher valuation at the
next funding event.

It’s important to get pivot points and funding events
aligned. If you develop a plan that
requires more money to be raised before you reach the pivot point you will not
have proven enough about your business to attract new investors. You will find yourself in the middle of the
funding desert without a drop of water or funding in sight! This kind of company is often called a
tweener!

On the flip side if you raise too much money, and assuming
you spend it wisely, you are likely to shoot past the valuation pivot points
and potentially end up as a tweener too! Raising too much money makes it more likely that you will ramp expenses
and either just make the next pivot point or worse, fall short. In either of these cases you will have raised
too much money and suffered more ownership dilution than you needed than if you
had just considered “ how much is enough” upfront.

There are many ways to format and present
budgets/milestones/pivot points. At
Ridgelift we like to keep it simple. My
partner Dave Newman has a favorite format (shown below) which I like as well, that
analyzes the amount of financing a company should be seeking. There
clearly has to be a lot more information and analysis to back this up, but it
provides a clear simple view of business on one slide.

Whatever form you might choose to keep both you and your
investors happy it’s important to figure out how much is “just enough”. If you’re having trouble sorting this out, drop
me an email – I’m happy to help.

My friends at IBD Networks, who are kind enough to cross publish some of my posts, are producing an interesting conference on Mobility November 16th from 8AM - 6PM on the Microsoft Campus in Mt. View. You can get details on the conference here. And they are offering a discount if you sign up in advance here.

If you go drop me and email, would love to hear what you thought of the event.

Stu has a couple of interesting posts on the rapid decentralization of
publishing by professional journalists. Matt Marshal’s announcement
this morning that he is leaving Silicon Beat and forming Venture Beat
offered another proof point of the accelerating pace of professional
journalists who are disassociating with mainstream media. He follows
in the footsteps of a number of other such as Om Malik and he won’t be
the last. I know of a number of other well respected folks in the
profession who have similar moves planned.

The reason for the exodus varies by individual. Many see the rapid
decline and commoditization of the news media and want more
journalistic freedom. But a number just want to work for themselves.
There is however a universal set of enabling technologies and trends
allowing this to happen. It’s the explosion of user generated content
as well as the decentralized publishing infrastructure and tools that
enable it.

Demand is growing and publishing tools are being put in place to enable
this kind of professional and semiprofessional content to be published
at a prodigious rate. But, the other shoe is waiting to drop. As we
decentralize publishing and eviscerate centralized editorial, how are
readers going to find the editorial voice and content that resonates?
There is rising demand for technology to replace human editorial.
There are a number of approaches to decentralizing editorial. Some
companies such as Digg and reddit are choosing the “wisdom of crowds”
approach by measuring what people “vote” for, others such as Google
News are using machine algorithms to filter and rank. But I think the
most satisfying one will be a hybrid that aggregates and filters based
on algorithms and collaborative filtering but goes further by adding
the magic of the individual’s editorial voice. The magic of
publications like the Wall Street Journal and New York Times (plus
every publication with which we identify) is after all, the voice of
the editorial staff. The need for that kind of voice isn’t going away,
it’s just getting decentralized.

I became intrigued and convinced of this trend some time ago and have
been fortunate enough to be involved as an investor and board member
with a company, The Personal Bee, innovating in this area. Next week
the company will be launching a new version of the product that will
enable journalists like Matt to not only publish more effectively, but
also to act as micro decentralized editors for readers who are
interested in their viewpoints and “voice” across topic areas and
content not just through the content they produce.

I suspect this is just the beginning of whole new set of decentralized
editorial tools and services to come. Would love to hear of other
ideas in the space.

Chris Anderson popularized the long tail of content by
observing that over a large diverse body of content, while a small percentage
of content is the most “popular”, there are opportunities in leveraging and
aggregating access to the niche content that makes up the tail.

Lately I’ve been seeing a lot of vertically oriented content
and application sites and it struck me that they share a similar phenomenon of
usage patterns that mimics the long tail graph. Since these sites have a
narrower content focus I think it might be more useful to people building these
businesses to change the perspective of the curve and to examine it from the viewpoint
of the user and their frequency of use instead of the frequency of use of the
content.

If we take that perspective from what I am seeing in these kinds
of businesses, the curve for many sites would look like this:

I’d bet that this pattern applies not only to niche sites
but also to broader content sites such as MySpace and YouTube. Let’s take a look at the different user
groups:

Zealots are people passionate about the content and functionality on the site who connect and use it regularly several times a week or even multiple times per day.

Casual Users are people that visit the site once or at most a few times a month. They don’t have a regular need or desire to be connected to the content.

Unengaged Users likely found the site through a search engine or other marketing vehicle; probably visited only a few times and intermittently. They have occasional use for the content or services on the site and tend to forget to visit except when the need arises.

A good strategy for gaining momentum, growing traffic and
revenue on the site would be to understand the characteristics of these user
groups. By using online surveys, focus groups and other profiling techniques
you can establish basic demographic and psychographic information and may be
able to develop rich profiles of the sub segments within each group.

Using this information you can explore the sub segments and
develop an operating/marketing plan that expands you business.

For Zealots I would consider:

What percentage of the population does this group represent? This gives you an estimate of the available market.

What percentage of that market would the site be able to attract? How big can this group really get?

How can you maximize the revenue from this group and at what rate? Are there services you can charge for?

Since this group is likely to be the most profitable, how and where can you target acquiring more of this type of user?

For Casual Users:

Are there hidden zealots in this group that can be converted to higher frequency users?

What changes or additions to the product would it take to convert this group to zealots?

For the part of this group that are not hidden zealots:

Are there effective ways to engage them more frequently?

What is the most effective way to monetize them and what is the life time value?

Can you really cost effectively acquire more casual users?

For Unengaged Users

Where and what do they typically look for and why do they engage in the type of content or service you provide?

What marketing tactics can you employ to be in front of them at the time they are interested in what you have to offer?

Do you have content or service that lends itself to Search Engine Optimization?

Can you make enough money on a single visit to cost effectively use Search Engine
Marketing or other performance based advertising to drive them to the site?

Are there sites with whom you can syndicate, partner or create a network with to drive traffic to your site?

When creating the operating and marketing plan for growth,
it’s good to keep a few things in mind:

Not all users are created equal.

Some
are more active and profitable than others.

There
needs to be a large enough available market so that you can attract enough
users with the right mix to make a profitable business.

Tailor the product features and the marketing so it performs effectively for each group.

Once you have analyzed and thought through the user data you
should have a clear picture of your target audiences; what you want to build
for them, how you will make money from them and ultimately if that group will
allow you to build a profitable business.

The ultimate goal is to change the shape of the curve by
broadening the appeal to ever increasing groups of users by continually adding
features and content. Start by
understanding what your current long tail of users looks like and expanding your
market from there.

IBD is accepting nominations for the Momentum conference which is going to be a showcase for companies that are showing real growth in the marketplace. It will be interesting to see the variety of companies that present, but even more interesting to see the common themes that emerge. It got me thinking what is momentum after all? In the world of technology start-ups I would argue that it is all about repeatability, predictability, and extensibility.

To gain momentum you need to be able to build on success, step by step. Whether it’s finding a repeatable sales model in a particular vertical or establishing a consistent release cycle for products, repeatability is the cornerstone of growth. Repeatability leads to a predictable business which in turns simplifies planning and a gives a higher likelihood of attaining momentum and continuous growth. Stable, predictable growth establishes a platform from which to expand the business by extending to adjacent markets.

The real question is how to get started on the path to the big Mo. Generating early momentum is often critical to the ultimate outcome. Take that to heart in the early stages of the company and it will serve you well. Your first entry into the market will set the pattern for months if not years to come. Focus on a product and sales process that is repeatable and you are closer to gaining momentum.

In my experience most companies falter early because they fail one simple task; talking to customers. This is a simple concept, but in the heat of battle gets forgotten especially when you are an early stage company that has an exciting product vision and has just raised seed capital. You have deadlines to meet and shareholders to please.

The typical response is to put your head down, focus on development in the hope of meeting self imposed deadlines – but did you validate the market requirements???? I have never seen a company fail because they got too much market validation – too frequently companies fail because they didn’t get adequate feedback from real customers.

Too little market validation winds up with the company having more enthusiasm about the product or service than the customer – a sure recipe for failure. You wind up with an endless cycle of reworking the product based on user feedback that you should have got earlier. To say the least, this is expensive and avoidable. Think instead of talking to customers early and often – this is critical even before you even start to develop the product.

Consider your potential customers; How can you segment them in a way to identify features and marketing techniques? What are the potential channels for distribution? Talk to your customer prospect. Face to face meeting, focus groups, web surveys; use your creativity and get out in touch with your prospects.

Sample each potential demographic and distribution channel so that you can have enough feedback to confidently draw conclusions and make plans. Don’t assume that you need to show a finished or nearly finished product. For web based products HTML mock ups work well, for software and physical products, paper prototypes and PowerPoint are more than sufficient. Don’t invest too much time and energy until you have determined you have a product or service that will generate sufficient demand to justify full scale development.

Take this approach and you will learn if people will buy your product or as importantly - why not? This feedback will help you modify your product or service to gain faster market acceptance. Doing this before releasing the product will shorten the sales cycle time saving time, money and frustration.

Early feedback from different market segments will tell you which verticals are likely to respond to your product sooner and the marketing messages to which they are likely to respond. This information provides critical feedback to your marketing plan and will shorten the time to a repeatable sales process – critical to generating early momentum. You can also use some of this early information later to prioritize and target future adjacent markets that will extend your business and continue the momentum. A topic I’ll cover in a future post.

Generating momentum requires repeatability and predictably; getting real customers with real revenue. Remember it starts with your first customer. Talk to prospects up front and you will be on your way to the big MO!.

Since my post Choosing Wisely – Business Models to Profit By, I’ve had a number of questions on how to choose milestones and goals for your business. As I mentioned previously, it’s important to come to a point of view on what you want your business to be and how you intend to get there. Your point of view may change, but if you start with a well thought out point of view at least you will have the perspective and data to make considered changes.

Milestones are simply interim way points or goals. They should be constructed so that the completion of a milestone provides a powerful indicator that you are on the right course. Missing a milestone requires that you consider the reasons for failure, rethink the ultimate goals of the company, or both.

When I help companies construct milestones I usually like to bucket them into three categories: Technology, Market and People. I also like to consider what stage the company is in, again I usually like to bucket stages into three categories – Proof of Concept, Going to Market and Scaling to Profitability. Different milestones are appropriate for each stage but in general you want to pick things that are pivot points for both risk and opportunity.

In the proof of concept stage technology milestones should focus on proving the feasibility of the core technology. For example, in a software or Internet company, there are often key algorithms that need to be developed. What milestones need to be achieved so that these algorithms provide compelling results to justify the essence of your company’s value proposition?

Market milestones should be chosen so that completion provides substantial proof that a large enough market exists to continue to the next stage. For example, you might complete a compellation of published market research on existing and related markets, gather market sizing information for your target market and conduct primary research and interviews with a representative set of your target customer base.

In the proof of concept phase, it’s important to measure the effectiveness of different people in their jobs, including yourself. When done early, honest appraisals of whether the right people are doing the right job can avoid costly and painful conversations later. Often this can be determined simply by evaluating who is achieving their goals and who is not. It should be obvious who is in the right role, and if it isn’t, well that is an answer too!

When your company is about to transition from the proof of concept stage (we are pretty sure we can build the technology, we are confident a market exists, and we have the right people and they are doing the right job), it’s time to think about milestones that will bring your product or service to market. In this stage, choose technology milestones that lead to a general release of the first product and a development process that allows for quick iteration to the next release or generation of the product based on initial customer feedback.

The most important marketing milestones will provide further validation of the market and identify missing elements of the product through feedback from a broad cross sections of target customers. It’s equally important to have milestones around developing a product specification based on that feedback as well as a marketing plan that includes initial sales or customer acquisition targets. Choose milestones and market metrics that prove to you and your Board the company is establishing market traction.

In the go-to market stage the company will hopefully be scaling quickly, requiring people to do a variety of jobs and exercise additional skills. Implement the milestone process deeper into the company will allow you to develop a broader evaluation process for more people than you put in place in the proof of concept phase.

Once you have firmly established yourself in the market (good initial customer base, broadly used by consumers etc.), the next stage is scaling to profitability. For technology milestones you will want to consider milestones around product cycle times, cost to deliver and other goals that will allow you to deliver a cost and feature competitive product.

Marketing milestones will largely revolve around scaling the sales or customer acquisition process economically. If you are an Internet company you should carefully monitor customer acquisition costs against lifetime value of the customer and drive towards making the customer profitable. In a more traditional software or hardware company, focus on milestones that guide you to a set of customers and sales processes that are repeatable.

At this point in the company’s evolution you should be scaling rapidly and it’s likely you will need to augment the team. Sales and Marketing are likely places to focus, but you should also evaluate needs across the company and establish timelines and milestones that insure you have critical human resources in place at the right time.

I’ve suggested a few ways to create a framework and establish goals/milestones for your company. Each company is unique and you should adapt or create milestones and goals that work for you and your particular situation. The important thing is to “Just Do It!”. Creating Milestones will help you avoid building a Millstone around your neck and contribute to building a successful company.

Hopefully my posting last month, Business Model Friend or Foe, convinced you that if you are starting a Web 2.0 company, a business model can be your friend. This month we will dive into how to begin building an appropriate business model.

The best place to start is with the simple question - How does my business ultimately make money? Now I know what many of you are thinking, I don’t have worry about that - I’m going to sell the company to (fill in the blank). Trust me, you don’t want to depend on that. I predict public media companies are going to be more sensitive to having acquisitions become immediately accretive. Even if they don’t, I guarantee that you will be acquired for more if you are generating revenue. So you should at least consider the question - How does my company make money for the eventual acquirer?!

While pondering this question there is a simple equation to keep in mind that fits most Web 2.0 companies.

Obviously, you want to maximize the first variable and minimize the other two.

Let’s start with the last variable first, Operating Costs. These costs will be dominated by salaries and benefits, capital equipment and bandwidth. Although you will be in a rush to bring your company to market, take the time upfront to consider the architecture that will minimize your server and bandwidth requirements and scale efficiently. The choices you make around architecture will live with you for a very long time. Two of the better illustrations of this are Google and Friendster. Google gained considerable cost and competitive advantage by creating an innovative, scalable and cost effective architecture. Friendster however made technical choices that proved not only to be expensive, but also hampered scalability and innovation - ultimately playing a significant role in the company not being able to continue to grow.

When it comes to salary expense consider the Build Before You Burn posting. Try to defer adding headcount as long as practical and make every hire count, hire people that are over qualified for the job you need them to do today but who can scale to what you need them to do in a couple of years.

Next let’s consider Customer Acquisition Cost. How are you going to drive consumers to your service/product and how much will it cost? There are many ways to do this and more are being invented every day; a few of the more popular methods are listed below. As you build your business plan, consider modeling several methods as you will not want to be dependent on a single marketing channel. Be conservative and realistic about the costs.

Viral Marketing – Being free it is obviously the most cost effective method for Customer Acquisition, but it’s also the most difficult to predict and control. Viral marketing is not a strategy you can depend on.

Search Engine Optimization – Potentially the second most cost effective method, but getting trickier and more competitive.

Search and other Performance Based Marketing – Again potentially effective, but the market is getting more efficient and competitive so you will likely have to pay more over time.

Tailgating – This is when you use free placement on another company’s site to drive traffic to you. This tactic that was successfully used by YouTube on Myspace and a number of companies on Craig’s List.

Affiliate Programs – similar to search marketing

Partnerships – these are difficult to forecast but potentially large drivers for the business.

At this point you have identified most of the costs associated with your business. Now you need to assess how long the customer will use your product or service. Be conservative and expect this to be a key number that will grow over time, but may start out lower than you think.

Now you have a pretty good view of the lifetime cost of a customer and how much revenue you will need to achieve to offset the expense and turn a profit. As with customer acquisition, there are many ways to monetize the customer and inventive entrepreneurs dream up new variations every day. The important thing is to develop a plan, execute on it and try several different methods. A few popular methods to consider are:

Advertising – Consider building targeting mechanisms into the product or service at from the beginning to achieve better monetization rates.

Ecommerce – What products might your customers be interested in purchasing and how can you construct your site so that it maximizes potential sales?

Lead Generation – Are your users potentially someone else’s customer too? Building in features that qualify and drive traffic to partners can be very lucrative.

Premium Service/Subscriptions – Most Web 2.0 products are free, but are you providing too much for free? Is there a part of your product that should be free and a part you could charge for as a premium upgrade?

Now you have all the pieces of data you need to develop a business model that becomes profitable over time. The process of developing the model and refining it as you execute should be iterative – feedback what you learn through execution back into the model. Develop a point of view of how your business becomes profitable and the steps you need to take to achieve profitability. It doesn’t mean that you won’t change your point of view over time, but it’s important to have path to profit so that you know when you’re off course and need to correct.

Yahoo and GE/NBC made a very interesting merger announcement today. They are going to combine their Spanish language websites and share advertising revenue. Most folks seem to be reporting it as media companies “growing interest in the Spanish language market”. I agree, but having worked at NBC and NBCi actually see it as potentially quite a bit more than that. Many traditional media companies and NBC in particular have been slow to embrace the internet and even slower to embrace new media partnerships like the one that announced today. Knowing how GE/NBC makes decisions this announcement represents a huge change. I think it’s a major shift in mindset for them that indicates more openness to partnerships of all kinds. This trend is already under way at other media companies like Fox and Disney, but now NBC seems to be very serious about leading the way

This makes total sense to me. Traditional media companies have a long been adept at producing great shared experience content and aggregating large audiences around that. And there’s going to continue to be a large (albeit shrinking) market, for that. Yahoo and other online media companies including startups have led the way in interactive and long tail content and services. It’s becoming apparent that it’s tough for either to have leadership in the other category. Yet there is tremendous value to be created for companies and consumers by combining the two competencies. Partnership makes sense and I think we are entering a time when attitudes are changing and it going to become much easier to form partnerships that exploit the core competencies from both camps. And not just big companies like Yahoo, but for start-ups too. Perhaps Stu should add a TV/Movie 2.0 category to his list.

For entrepreneurs this is fantastic opportunity. It may now be seriously worth spending the time to consider how you might create and get value from the large audiences that traditional media companies aggregate. If you’ve got any great ideas let me know, I may be able to help with some introductions.